The Dow Jones Industrial Average finished down a massive 634 points after Obama gave an uninspiring address in response to the downgrading of America’s credit rating Friday by S&P. Although S&P had expressed concern about America’s mushrooming budget deficits, Obama had no solutions or new proposals. He simply “uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class-warfare.” A Washington Post writer called the speech “horrifyingly bad” : “He was a half hour late. His head turned from side to side as if he were attending a tennis match. He practically never looked in the camera, as if he were averting our gaze. And those were the strong parts of President Obama’s disastrous speech. It was a bit like a slow-motion car crash. After a while, one stopped listening to the blather and simply watched the stock ticker go down and down. And down some more.” As another commentator noted, “While the president spoke, the markets continued to slide downward.” Indeed, the slide accelerated.
Obama’s failure to offer any plan to cut the deficit and restore America’s credit came shortly after China blasted the U.S. government’s “addiction to debts” and called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs.
The President’s supporters have sought to argue that it was the brinkmanship over the debt ceiling deal — not the rising deficits during the Obama Administration — that caused the downgrade. The New York Times‘ liberal editorial board once again called for even more deficit spending to try to stimulate the economy (never mind that economists found that the $800 billion stimulus package failed to create jobs).
But news coverage of S&P’s decision made clear the downgrade would never have occurred if the government wasn’t running up unprecedentedly huge deficits (the deficit went from $160 billion in 2007 to $1.6 trillion under Obama). As USA Today reported, “The U.S. lost its esteemed AAA credit rating after being downgraded by Standard & Poor’s Friday, eroding the elite standing it has held in global markets for more than 70 years. The nation’s credit rating was cut to AA+ after S&P said the compromise made by Congress and President Obama this week to cut spending and boost the debt ceiling ‘falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.’ S&P’s statement was blunt in its assessment,” citing a failure to contain “‘the growth in public spending, especially on entitlements.’”
The nation’s financial image has also suffered from the fact that when the Democrats controlled Congress, they failed to even pass a budget, perhaps because doing so would have exposed their massive deficit spending, which now is well over a trillion annually (as a result, there has not been a federal budget, formally speaking, in the last two years). The President’s financial stewardship is even worse: he “proffered one budget that was so unserious it was voted down in the Senate, 97-0.”
My brother, a former hedge fund manager, understands why S&P downgraded America’s credit rating, but does not understand how it could do so without also downgrading France and the United Kingdom, which retain S&P’s AAA rating, unlike the U.S., which now has only a AA+ rating. He is particularly baffled that S&P rates France’s credit better than America’s.
Even though I have a very low opinion of current US financial management (where the right wing will accept no taxes, and the left hates entitlement cuts and considers almost everything that is not an entitlement an “investment”), I am still baffled by this. Does this mean France and UK debt levels are expected to hardly rise over the next five years? If the UK is now at 80% but will be less than 83% in 2015, how does that happen, with the deficit currently several times the 3% gap? The UK deficit is nearly as bad as the US. France’s is a bit better, but still near 7% of GDP. So their debts must surely grow. Maybe the UK gets some debt reduction from selling off its nationalized bank stakes, but at current market prices, it’s round-off error. France does not have its own currency, so could face higher rates for some time to come on its debt. The UK does have its own currency, but Asian central banks don’t have to own pounds to keep their dollar pegs, the way they do with treasury dollar debt.
I can’t see why either UK or France is above AA, really, much less AA+. The French socialists, likely to retake power, promise deficit reduction, but they also promise to reduce the retirement age back down to 60 from 62, which is sheer madness as Mitterrand’s cut from 65 to 60 is what wrecked French finances. I wouldn’t put France above AA-, given this and the lack of French currency sovereignty.
I think calling the US AA+, rather than AAA, is probably right, given the long-term entitlement growth challenge, but if the people in the white house complain, I could see why, given this divergence.